Over-signaling vs Underpricing: The Role of Financial Intermediaries in Initial Public Offerings
AbstractWe consider a model of Initial Public Offerings (IPOs) where issuing firms of better quality are more reluctant to go public. IPOs either generate or destroy value depending on the type of the issuing firm, which is only observed by the issuer. We show that, when the issuer directly offers the shares to the investors, market breakdown occurs. This is caused by the issuer s attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which - 1) acts as an underwriter,2) influences the offering price. Underwriting creates a wedge between the interests of the intermediary and those of the issuer. This allows trade with outside investors to be restored. A by-product of the conict of interest between issuer and intermediary is that trade is characterized by underpricing. In the benchmark case where her profits are zero, the intermediary acts as a screening device - she underwrites the shares only upon receiving positive information about the issuer.
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Bibliographic InfoPaper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200714.
Date of creation: 2007
Date of revision:
ipo; financial intermediary; signaling; underwriting;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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